ESG in Manager Selection Process

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ESG in Manager Selection Process Agenda Importance of ESG in the Nordics Scope of study The interest in ESG Implementation of ESG Arguments for and against ESG ESG in external manager selection The role
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ESG in Manager Selection Process Agenda Importance of ESG in the Nordics Scope of study The interest in ESG Implementation of ESG Arguments for and against ESG ESG in external manager selection The role of external managers The cost of ESG The willingness to pay for ESG A Danish study Management fees ESG in RFPs Best practice in RFPs or lack hereof Summation 1 Responsible Investor Kirstein s pan-european ESG Investor Survey Purpose To uncover how European investors integrate ESG in their investment process and not least how this affects their choice of asset managers How do investors handle ESG issues in the investment process? 36 Nordic institutional investors participated Response rate of 84% in the Nordic countries Encompasses 81 European institutional investors: The Nordic region Denmark, Finland, Iceland, Norway and Sweden The Benelux region Belgium, Luxembourg and The Netherlands The rest Austria, France, Germany, Switzerland and the United Kingdom 2 Responsible Investor Relevance and importance of ESG Relevance of ESG issues In general Equity Fixed income Alternatives Denmark Finland Norway Sweden Nordic % Response rate The table illustrates the relevance of ESG issues to the investors organization in general and on different asset classes. The highest overall relevance of ESG is indicated by Norwegian investors, while the Nordic average is held back by the Finnish investors High allocation to government and mortgage bonds can explain the relatively low interest in ESG on fixed income in Denmark and Finland 3 Responsible Investor Relevance and importance of ESG Arguments in favour of ESG The investors are driven by: A wish to comply with the board s as well as the clients opinions on ESG The perception that ESG investments will improve the long-term investment results and at the same time reduce the risk in the portfolio A belief that ESG will improve global sustainable development Compliance with public opinion Compliance with clients' opinion Compliance with board's opinion Improve short Improve long term term investment investment result result Reduce risk in portfolio Improve global sustainable development The figure illustrates how important investors rate different arguments in favour of ESG. 4 Responsible Investor Relevance and importance of ESG Arguments against ESG The main arguments against ESG investments are the difficulties in interpreting what exactly ESG investments mean This also explains why lack of experience is one of the main arguments against ESG The cost of implementation is also an important argument against ESG investments Difficult to interpret Reduce short term Reduce long term returns returns Increase risk in portfolio Lack of proper benchmark Costly to implement Lack of experience The figure illustrates how important investors rate different arguments against ESG. 5 Responsible Investor Implementation of ESG Screening methods Negative screening remains the most used ESG tool Of the investors who apply positive screening, 30% also apply negative screening Few investors have indicated that they solely apply positive screening Active ownership is gaining ground and more than 60% of investors engage in active ownership UK investors are very active when it comes to engagement and so are many of the Nordic investors Active ownership Positive screening Negative screening 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Yes No The figure illustrates which screening methods the investors employ. 6 Responsible Investor External managers ESG s impact on external management ESG impacts the way many investors approach external managers Some investors have indicated that even though ESG are of little interest in the selection process of asset managers currently it will play a role in the future Some Danish investors expect ESG to be a part of the external managers strategy already More than half of the investors leave part of their ESG decisions with their external managers This is in line with the fact that many investors emphasize that managers need to be in compliance with their ESG policy, as decisionmaking power normally is left with the managers Denmark Finland Norway Sweden Nordic 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Yes No 98% Response rate The figure illustrates the impact ESG has on investors approach to external managers. 7 Responsible Investor External managers Evaluating managers ESG factors Compliance with ESG principles is very important Most investors find that integration of ESG in the investment process is important Dedicated ESG products are not seen as vital in relation to evaluating managers Compliance with ESG principles ESG- related network Monitoring and reporting Transparency Dedicated products Analytical competencies Integration in investment process Track record 86% Response rate The figure shows which factors the investors find important when they evaluate external managers on ESG. Compliance with ESG principles is abbreviated from the original question which cover Compliance with UNPRI/UN Global Compact or other Principles. 8 Responsible Investor External managers Selection criteria the relative picture 5.0 Investors still attach the highest relevance to performance and organization Is there a conflict between ESG and returns? Among the respondents, it is the largest investors that place highest relevance on managers awareness of ESG Higher than the relevance of service 1.0 Performance 1 Organization 2 Investment team 3 Philosophy 4 Risk management 5 Quality of 6 research Service 7 Reporting 8 Flexibility and 9 responsiveness Staff 10 Sparring 11 Awareness on SRI 12 Assets below EUR 10 bill. Assets above EUR 10 bill. The figure illustrates the relevance placed by the investors on the overall parameters as well as the detailed parameters, divided on investors with asset below EUR 10 billion and above EUR 10 billion. The scale is Responsible Investor ESG and performance Is there a conflict between ESG and returns? Many argue that there is no conflict ESG compliant companies will perform better in the long term Some studies seem to confirm this Mercer 10 out of 16 academic studies show a positive relation between ESG and performance AP7 Covers 21 academic studies looking af E(nvironmental) and S(social) issues and concludes that there is no correlation between ESG and performance Thus being ESG compliant is easy and does not involve difficult choices! Do we agree? Well, we seem to have our doubts Why should a smaller universe result in higher returns? Other very simple comparisons seem to contradict the positive attitude Two good managers And what is the economic effect of activism? Will we ever know? The direct impact is difficult enough to gauge 10 Responsible Investor Ethical versus non-ethical funds Relative performance 105 Accumulated excess return BankInvest Basis Etik (SRI) compared to BankInvest Basis Aberdeen Ethical World compared to Aberdeen Global 11 Responsible Investor Willingness to pay for ESG What do Danish pension funds say? 40% 35% 30% 25% 20% 15% 10% 5% 0% Accept any given consequence Accept substantially lower return Accept marginally lower return NOT willing to accept lower return Does not know/unsure AP MP PJ D Total 12 Responsible Investor Willingness to pay for ESG Customized ESG management 90% of investors are only willing to pay 0 5 basis points for customized ESG management This indicates that investors demand additional services from the managers without necessarily being willing to pay Denmark Finland Norway Sweden Nordic Austria/Switzerland Benelux France Germany UK Total sample 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0 bp 0-5 bp 5-10 bp bp above 20 bp 60% Response rate The figure illustrates the investors willingness to pay for extra customized ESG management offered by external managers. 13 Responsible Investor ESG in external manager selection Evaluating managers RFP s What are the requirements in RFPs? So far there is little attention to ESG in RFPs Few Nordic investors prioritize this Best practice is (close to) none-existing The majority of managers answer with clichés or empty words Examples: Please provide a description of your ESG guidelines: Optimizing the return of clients investments is XX s primary objective. Ethical considerations are part of the investment decision making process along with other factors that can influence return In matters of social responsibility XX follows national legislation and the guidelines set by the Danish Ministry of Foreign Affairs For the time being we have opted for a solution whereby we will be looking at clients needs on an individual basis, and apply their ESG requirements accordingly. We do, however, co-operate closely with GES Investment Services which is Northern Europe s leading research and service provider for Responsible Investments. GES is responsible for screening each buy and sell decision we make prior to its implementation 14 Responsible Investor ESG in external manager selection Evaluating managers RFPs Why is there so little attention to ESG and the consequences hereof relative to risk management? What should managers do in relation to RFPs? Be very specific in your answers Give examples of your approach to ESG, how does ESG affect your investment process and your philosophy? Does ESG have a negative impact on portfolio construction and performance? It is fair to indicate that implementing ESG can have some negative consequences It is not credible only to explain the (potential) positive effect of ESG 15 Responsible Investor ESG in external manager selection Summation High overall interest in ESG Compliance with board and clients. Improve global sustainable development Difficult to interpret Understand the investor ESG impacts the way investors select and monitor external asset managers Compliance with ESG principles and integration in investment process Selection criteria Performance is the most important factor but ESG is gaining in importance The potential conflict between ESG and performance Willingness to pay for ESG 90% of investors are only willing to pay 0 5 basis points for customized ESG management RFPs You have the opportunity to influence best practice and set the bar high 16 Responsible Investor Other services from Kirstein A/S Nordic Investor Survey 8th edition in 2013 Benelux Investor Survey 3rd edition in 2013 Ambitions for the whole Europe DACH Investor Survey (Germany, Austria and Switzerland) Pan-European Investor Survey ESG Tailor made solutions for asset managers and investors For more information please contact Head of Financial Market Research Jan Willers or visit 17 Responsible Investor
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